When one thinks of building their credit score, their first thought comes with needing to acquire debt. And as someone who recently entered the job market and have heard or seen the negative effects of having debt, you might not want to put yourself in a compromising position. However, as an adult, you soon realise that to acquire certain assets in life, you do need financial assistance. Now before we get into how you can build credit after college, let us briefly discuss what exactly is your credit score.
A credit score is a three-digit number used by lenders to determine the likelihood that you will stick to your loan or credit agreement. A credit score check is one of the only ways lenders can vet your trustworthiness before offering you any financial assistance. Of course, the higher your credit score, the more likely you qualify for competitive loan terms and save money on interest rates when seeking funding either through a credit card, personal loan, vehicle finance or a bond for a home.
To have a credit score, you need a credit history, which means borrowed money that you have repaid in due time. As a graduate, you may not have a rating, and it is hard to obtain any funding with a low or bad credit score. To find out how you can build and improve your credit score, read the article below.
Understand how credit works
To ensure you have a good credit rating, you need to understand how it works and use credit wisely as a graduate. You’re only starting out in your career and making the wrong financial decisions now will negatively impact your future. But the right decision can help you make your business venture a reality, or help you buy your dream home one day. To get credit to work for you, you need to understand how you can improve it and what the credit bureaus look at when they calculate it. They look at your payment history, the total amount owed, length of credit history, new credit and your credit utilisation (how much of your credit you’ve used in comparison to how much you have available).
How to build your credit score
Now that you understand the logistics of how it works, you may be wondering how you can improve your score. If you have tried to seek financing, you may have been rejected before as there aren’t loans for low credit scores in South Africa apart from graduate finance. Graduate finance is a financial agreement designed for graduates who recently started working and wish to purchase a vehicle. Lenders understand that you can’t grow your credit score or purchase a vehicle without some form of a credit to start with. So, car finance for graduates allows you to do just that; purchase a vehicle without any credit or low credit history. While some may say you should apply for a credit card to grow your credit score, it’s always important to know what you will get from your debt. Consumable debt like clothes, foods and entertainment can turn into bad debt as you’re racking up your credit on things that don’t bring long-term benefits or value into your life. Whereas with purchasing a vehicle, you get to keep the vehicle for a long time and still get value from it even after you have paid it off. This makes it a good debt rather than bad debt.
Once you have been pre-selected for graduate financing, here is how you can maintain your credit score:
Check your report regularly
When it comes to your credit score, you must know what is going on. You need to regularly check it and ensure that there aren’t any errors on your report. Mistakes can happen, or you may be involved in identity theft and credit card fraud which may affect your credit score. Sometimes you may not realise that something is wrong until you take a look at your report and ensure that everything is as it should be. Keeping tabs on your credit report ensures that you can rectify any mistakes before they negatively impact you or your chances of getting loan approval.
Make payments on time
Once you’re in a loan agreement, it’s vital that you pay on time. The same goes for any other bills you need to pay. Missed or late payments are noted on your credit report and can bring your credit score down. Your payment history is one of the most important factors in determining your score, but it is also the hardest to rectify. Missed payments can stay on your credit report for a couple of years. This will influence your chances of getting financed in the future as your payment history will serve to see how trustworthy you are, and how bad of a credit risk you may be for them.
Borrow what you can afford
As you get used to having credit, you may consider opening up different types of credit. While this can help you improve your credit score, as credit bureaus use this information to calculate your score, you need to be wary of how much debt you have. If you have a store account or credit card balances, make sure you stick to a credit limit you can afford to pay off. Sticking to a limit you’re comfortable with not only helps you pay your bills on time but also helps you keep your credit utilisation low. Your credit utilisation is the amount of revolving credit you have (credit cards and store accounts) divided by the actual amount of credit you’ve used. If the bureau can see that you’ve used more than 50 percent of your total available credit, it is seen as if you’re heavily relying on your credit, meaning you’re a credit risk to lenders.
Don’t close your accounts
As mentioned previously, your credit score is all about your credit history. It tracks how well you handle your credit throughout the years. This is why it’s in your best interest not to close your accounts once you’ve settled any outstanding balances. Closing an account means that they can no longer use that account as a reference to your financial credibility. When calculating your score, they consider how long you’ve had your accounts, and how well you have taken care of them. While your history may still be non-existent now as you’re only starting to get used to credit, it will help you in the long run to keep your accounts open, even if there isn’t a balance on them.
When you start building your credit, it can seem like a lot to take on. However, after a while and once you get the hang of how the credit world works, you can find a way to improve your score without falling into any debt traps. When it comes to acquiring debt, always ensure that they improve your life and take longer to lose value. That way, you’re able to keep those assets even after you’ve settled your debt. Remember that it may be easy to build your credit, but it takes longer to repair it once it drops. So, always make sure you pay your bills on time, only take on credit when you have to, and keep your utilisation low.